Illinois Introduces Automatic Retirement Savings Program, a First for the Nation

Illinois is taking a novel approach to getting its residents to save for retirement. Starting in 2017, most state residents with jobs who don’t already have a retirement plan at work will be automatically enrolled in individual retirement accounts, funded through a 3 percent deduction from their paychecks.

The program will be created under a law signed by Gov. Pat Quinn on Sunday. Participation will be voluntary, but workers who don’t want to save will need to opt out manually. (They will also be allowed to save more than 3 percent if they wish.) An estimate produced by the plan’s backers found that up to two million of the state’s residents may end up with the accounts.

The plan, called Secure Choice, aims at a gap in America’s retirement saving system: Employer-based savings plans are supposed to be an important source of Americans’ retirement income, but large employers are far more likely to offer such plans than small ones. The plan is similar to one President Obama has advocated at the federal level, and if it is successful in getting more people to save, it may end up being a model for other states and the federal government.

According to data from the Bureau of Labor Statistics, 85 percent of Americans who work full time at employers with 100 or more employees have access to a retirement plan at work; just half of full-time workers at smaller organizations do. Lack of access to employer-based plans is one of the reasons middle-income Americans tend to have not saved enough for retirement.

Just 52 percent of households headed by a worker aged 55 to 64 had a 401(k) account in 2013, according to the Center for Retirement Research at Boston College; the median balance among households nearing retirement that had accounts was just $111,000.

Often small employers don’t offer retirement plans because doing so is a significant administrative and cost burden. Under Illinois’s plan, participation will be mandatory for employers with at least 25 employees, but the employers’ administrative burden will be limited to taking a payroll deduction, similar to the ones they already take for taxes. A vendor chosen by the state will do the work of administering the retirement plans.

Of course, you don’t need a 401(k) to set aside money for retirement. Anyone can call up a company like Fidelity or Vanguard and open a Roth I.R.A. substantially similar to the accounts the state is about to give out through Secure Choice. But those accounts aren’t established automatically and funded directly out of workers’ paychecks, both features that are likely to lead to more saving.

“The data show that access to a plan that operates by payroll deduction enormously changes participation from basically zero to over 50 percent,” says state Senator Daniel Biss, a Democrat from Evanston who was the proposal’s lead sponsor.

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The state Senator Daniel Biss, a Democrat, is the proposal’s lead sponsor.CreditNathan Weber for The New York Times

Part of what helped the plan go through is that it involves no costs to taxpayers, an important matter in a state with a more-or-less permanent budget crisis. (Costs will be paid by savers, who will be charged up to 0.75 percent of their balances.)

In Illinois, individuals aren’t the only ones who are bad about saving for retirement; for decades, the state has promised pension payments to state and local government workers without setting aside enough money to fund its obligations. The need to make catch-up payments into its public employee pension systems, which are some of the worst-funded in the country, has crowded out spending in all sorts of other areas and would have made it hard to put public funds toward a retirement system for private-sector workers.

Of course, the appeal of zero-fiscal-cost programs is not limited to Illinois. For years, Mark Iwry and David John of the Brookings Institution have been advocating an “Automatic I.R.A.” program at the federal level, to enroll Americans without employer-based retirement plans in savings accounts.

President Obama promoted the idea in his State of the Union address last year, and the Treasury Department has started a program called MyRA that offers such accounts in a very limited form. It is funded through payroll deductions but has no investment options other than paying interest like a savings account, and has a maximum balance of $15,000. (Secure Choice’s default investment option will be a target date fund, a kind of investment vehicle that shifts from stocks toward bonds as the investor nears retirement.)

Starting at the state level will offer opportunities to test out ideas and figure out what works. Experts are cautiously optimistic about Illinois’s law, but expressed a desire to tinker with its details, such as the 3 percent default payroll deduction.

“If I had written this law, it would have started at six,” said Richard Thaler, a behavioral economist at the University of Chicago who works on “choice architectures” that encourage saving. After all, it’s not enough to have a retirement account; you need to get enough money into the account to live on in retirement, and for most Americans, Social Security plus a retirement account funded by 3 percent of wages won’t produce enough savings.

Andrew Biggs, a retirement policy expert at the American Enterprise Institute, expressed concern about the fact that the smallest employers, with fewer than 25 employees, do not have to participate. “Are we missing the employers who are least likely to offer plans?” he said in an email. Like Mr. Thaler, he also worried that the 3 percent default contribution was too low — though both noted that 3 is better than zero.

Mr. Biss, who was an academic mathematician before entering the legislature, conceded that his plan was not a cure-all for retirement undersaving and even agreed the default contribution rate was too low. In an email, he noted he fought to raise it from 2 percent; a higher rate looked politically impossible.

“It should certainly be a step toward broader retirement system reform,” he said. For example, he’d like future reforms to allow for an employer contribution to these kinds of savings plans, which would increase the savings rate but isn’t currently possible under federal law. Retirement policy is heavily driven by the federal tax code; an eventual federal program would have the advantage of Congress’s being able to make necessary changes to tax laws when designing it.

But first, Mr. Biss is focused on the implementation challenges of the next two years.

“By going first, you obligate yourself to do it well or else you wreck the whole program nationwide,” he said.

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A version of this article appears in print on , on Page B3 of the New York edition with the headline: Illinois Will Introduce Automatic Retirement Savings. Order Reprints | Today’s Paper | Subscribe